The Prideful Worker Effect

Both economists and laymen often claim that unemployment statistics paint an overly rosy picture of the labor market. Why? Because they refuse to count discouraged workers as "unemployed." To qualify as "unemployed," you have to look for a job. But especially during recessions, many workers who genuinely want jobs abandon their search because their efforts seem hopeless.

The next step: As soon as the discouraged workers tell the government they've stopped looking, they're officially converted from "unemployed" to "out of the labor force." This problem seems unusually important during the recent recovery - the unemployment rate is falling, but so is the labor force participation rate.

I have no doubt that the Discouraged Worker Effect is real and sizable. But almost no one discusses a potentially important offsetting effect. I call it the Prideful Worker Effect. Key idea: Some officially unemployed workers have unreasonably high expectations. They focus their job search on positions for which they are underqualified - and ignore lower-status but more realistic opportunities. Officially, they're "unemployed." In reality, though, we should probably consider them "out of the labor force."

Intuitively, I'm not an unemployed astronaut, because I'm not an astronaut at all. If I held out for a job as an astronaut, the statistician who codes me as "unemployed" turns my delusion into a folie a deux.

The Prideful Worker Effect, like the Discouraged Worker Effect, is a matter of degree. We could argue for hours about whether any particular individual belongs in either box. So it's no wonder that official statistics prefer bright lines, even if the bright lines are misleading. But vagueness has not prevented economists from trying to measure the prevalence of discouraged workers. Why not come up with some plausible measures of prideful workers, and see what we find?

Comments and Sharing

The "prideful" worker (who has unrealistic expectations of his earning potential) will eventually become the discouraged worker. But one plausible measure of the "prideful" worker are the long-term unemployed, those unemployed for greater than 26 weeks for instances.

Actually, there are alternative measures of unemployment. The U-3 is the official unemployment rate. The U-4 is a broader measure of unemployment that includes discouraged workers. Adding discouraged workers increases the unemployment rate by one half a percentage point.

On reflection, I’m not sure why a "staunch anti-nationalist" would concern himself with the national unemployment rate or for that matter national GDP, productivity, employment, national tax rates, national investment and savings. Shouldn't you concern yourself with the world unemployment rate and the world labor force participation rate?

I think the prideful workers generally are the same people as the discouraged workers. For the most part, if you present yourself well, are willing to show up to work on time, and are literate enough to say, work a cash register, there are jobs out there for you. Obviously there are some workers that don't meet these requirements, legitimately can't find a job, and eventually move into the discouraged worker class. But I would guess that a lot of the discouraged workers are people that had low ranking 'professional' or office jobs before, can't find work they think is worthy, and move to the discouraged workers class without ever applying for a job at a walmart, mcdonalds, etc.

Earl Thompson thought that recessions were caused by workers having overly optimistic expectations of the nominal wage they could get on the market. Very relevant to the current debate about the effects of unemployment benefits.

We shouldn’t worry much about whether “prideful workers” are distorting our interpretation of the unemployment rate as a measure of welfare. That’s because we should always remember that the unemployment rate is a spectacularly bad measure of welfare. This is not surprising since it was intended mostly as a way of describing the demand and supply and of labor.

With that said, prideful workers distort our understanding of labor markets in a very different way than do discouraged workers . A change in the number of discouraged worker has a clear impact on labor markets—at least if we define a discouraged workers as someone with the skills necessary to perform a job but for whatever reason chooses not to supply labor. I may be a lousy economist but I’d be a terrific Walmart greeter. If I get fired as an economist, I probably won’t apply at Walmart. I’ll be a discouraged worker, a fact that benefits the willing greeters.

A prideful worker claims to be willing to supply labor at the equilibrium wage but is unable to satisfy the real needs of an employer. As such, the prideful worker appears to be adding supply side pressure to the labor market, but in fact has no impact at all. I’d be glad to run JP Morgan for half of what Jamie Dimon gets paid. Jamie’s bonus is not threatened by my offer.

I have direct experience with this prideful worker syndrome. On two occasions I have received unemployment pay for the allowed duration (six months if I recall correctly).

On the first occasion, I had been retraining myself starting in 1999 to work as a software developer. I got my first job in my new profession in mid 2000, right near the end of the dot-com bubble. The company that hired me was over optimistic. They spent some venture-capitalist's money to hire developers in order to have staff on hand when the anticipated contracts came in. But the contracts did not come in. I was laid off after five months in one of the company's dying spasms.

In retrospect there was a bubble, too much hype. There never had been a productive place for that company in that economy. Perhaps, similarly, there never had been a productive place for me, as the developer I was trying to gussy myself up to be, in that economy.

Yet, when I applied for unemployment pay, I noticed an assumption in the structure of the government system. They took my word for it that I was an unemployed software developer. They would give me unemployment pay as long as I looked for work in the field which I claimed as my profession: as a software developer.

There was nothing in the government system, as I experienced it, that could recognize that a worker's claimed profession was unneeded in the economy.

Suppose an industry needs to die because it is unneeded. The laid off workers should start training immediately to change professions. But the government will pay them for six months to sit around and do nothing but seek work where no work exists.

Our official method of calculating unemployment is worse than described above. Not only does the method omit discouraged workers, it also omits:

High school dropouts and high school and college grads who have not found jobs. They never worked, they are not eligible for unemployment compensation, so they don't get counted as unemployed.

People who left the workplace years ago and want to return. (Typically women whose children are grown.) If they haven't worked in recent years, then they are not eligible for unemployment benefits and don't get counted as unemployed.

There are millions of people in those categories. If they were factored in, the unemployment percentage probably would rise by more than 2%.

@RP Long: In a two-worker family with one unemployed, if the one who currently is employed is the primary breadwinner, then moving away so the spouse can get a job usually isn't an option.

First of all, one's eligibility for unemployment compensation has nothing to do with whether you are counted as unemployed. The number of people receiving unemployment compensation is probably about ONLY a third of the total number of unemployed. I should probably stop here to let that sink in to peoples' heads for a while.

The unemployment rate is calculated by a survey. It is called the Current Population Survey. A questioner comes to your door and asks you questions about whether you are employed or have been actively seeking work within the last 4 weeks. And guess what? The person answering the questions could be a high school dropout or a college grad who has not found a job. The person answering the questions could be someone who has left work years ago and wants to return. The person could be a mom whose children have grown. You may not even be eligible for unemployment compensation. Oh my. The person’s answer is recorded by the questioner and that person’s answer is part of the survey that is used to calculate the unemployment rate. To be part of the survey there is no requirement that you are eligible for unemployment compensation. There is no requirement that you are currently receiving unemployment compensation. There is no requirement that you have worked in the past. And, BLS even calculates an alternative unemployment rate that includes discouraged workers (U-4) for you.

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